Bucking the trend: 2024 GCC banking outlook

The GCC banking sector will remain resilient in 2024, bucking the global trend, amid robust economic growth in the non-oil sectors across the region.

Moody’s projected that GCC banks’ liquidity buffers will stay ample this year and profitability will remain strong in stark contrast to the global market, where profit is expected to plunge on higher funding costs, lower loan growth and loan-loss provisioning needs.

Banks in the Gulf region have weathered several storms in recent years from the 2008/09 global financial meltdown to last year’s banking crisis that culminated in the collapse of three US regional banks and Swiss banking giant Credit Suisse.

However, despite the volatility in the global market, regional banks are benefitting from strong operating conditions supported by high oil prices, contained inflation and high-interest rates.

“We are of the view that banks in the GCC will continue to perform well in 2024 after showing a stellar performance in 2023,” says Mohamed Damak, managing director at S&P Global Ratings.

“Banks have benefited from the increase in interest rates in 2023 and the relatively supportive non-oil economies in most GCC countries.”

Digital transformation is the future of the GCC region’s banking sector. By automating processes and leveraging innovative technologies such as generative artificial intelligence (GenAI), banks can reduce their reliance on manual labour and lower operating costs.

“The integration of GenAI into banking operations has the potential to revolutionise the industry by enhancing efficiency, customer experience, and decision-making processes,” observes Abbas Basrai, partner and head of Financial Services at KPMG Lower Gulf.

GenAI dominated the financial services technology conversation in 2023, and the debate is set to continue this year. Global accounting firm Deloitte said in its 2024 banking outlook report that the impact of GenAI, industry convergence, embedded finance, open data, digitisation of money and digital identity will increase this year.

GCC banks are also leveraging innovative technologies and GenAI to assess the sustainability of their lending portfolios and develop new sustainable finance products and services.

Meanwhile, sustainability has become a topic of crucial importance for many corporations in the GCC region, financial institutions included. One reflection of this is the UAE banking sector’s pledge to mobilise $270bn (Dhs1tn) in green finance by 2030.

Vijay Valecha, chief investment officer at Century Financial says the pledge by UAE banks at COP28 signifies a pivotal moment in the financial industry, where sustainability takes centre stage.

The latest data shows that the outlook of the Gulf region has strengthened, with a 3.6 per cent GDP growth projected in 2024, driven by robust oil prices and the improvement in non-oil activity.

From an Islamic banking perspective, Redmond Ramsdale, Fitch Ratings’ head of Middle East Bank Ratings and Islamic Banking says the GCC region’s real GDP growth in 2024, together with non-oil sector growth of about 3.5 per cent, will support moderate financing growth.

It is worth noting that economic growth in the Gulf region is mirrored in the performance of the banking sector, which is experiencing a period of much-welcomed profitability.

An enabling environment

The GCC banking sector remains unscathed by the global financial turmoil, owing to regional banks’ solid liquidity buffers, and low-cost and stable customer deposits.

Asad Ahmed, managing director and head of Middle East Financial Services at Alvarez & Marsal highlights that banks in the Gulf region have proven to be more resilient to market challenges than their global counterparts.

“From where we are today, we expect 2024 to be a stable year for banks, net interest margin will show slight downward movement as interest rates begin to decline; cost of credit is likely to show some increase if the continued higher rates affect credit quality; return on equity and return on assets are unlikely to show any major surprises,” he explains.

Despite a projected deterioration in asset quality indicators and an increase in the cost of risk, GCC banks will report stronger profitability in 2024 supported by higher margins from higher rates, increased business volumes and lower loan-loss provisions.

“Profitability will continue to benefit from higher interest rates in 2024, supported by high levels of low-cost deposits and muted financing impairment charges. Fitch does not expect the US Treasury to start cutting rates, impacting the GCC, until at least mid-2024, and this is likely to be very gradual,” adds Ramsdale.

The region’s top five lenders – Saudi National Bank, Al Rajhi Bank, Qatar National Bank, First Abu Dhabi Bank and Kuwait Finance House – posted $1.34tn in combined net assets in the nine months to September 30 and Moody’s said profitability will remain strong in 2024 after record profits last year.

GenAI in banking

The exponential pace of new technologies, and the confluence of multiple trends, are influencing how banks operate and serve customer needs.

“From chatbots to fraud detection, innovative technological tools that utilise large volumes of data are increasingly being used for more efficient credit, investment and business-related decision making,” says KPMG Lower Gulf’s Basrai.

Several banks in the GCC region are piling into GenAI as the hype surrounding the buzzy technology shows no signs of fizzling out.

While AI-facilitated automation and prediction are common parts of banks’ digitalisation journeys, investment in and adoption of tools driven by GenAI-powered systems remain nascent. However, the potential for the new AI to reshape banking seems vast and its benefits are likely to prove incremental.

“The strides made by GenAI, exemplified by OpenAI’s GPT-4 and Alphabet’s Bard, present a transformative opportunity for the banking sector. The technological advancement holds the potential to revolutionise the industry by reshaping how banks deliver value, improve efficiency, and foster innovation,” says Valecha.

GenAI promises to reshape the banking industry, at a steady and incremental rate, by providing new capabilities, revenue opportunities, and cost reductions.

Dubai’s Emirates NBD partnered with Microsoft in July 2023 to harness the power of GenAI to advance the banking group’s operations and productivity across various business functions. The collaboration seeks to unlock new opportunities for innovation, efficiency and customer experience within the banking industry.

Damak notes that the bulk of banks’ near-term use cases will likely focus on offering incremental innovation (i.e., small efficiency gains and other improvements across business units) and will be based on specific business needs.

GenAI is revolutionary. The most immediate impact that the innovative technology is expected to have on banks, much like digital transformation before it, is further advancing customer experience and personalised product offerings.

Journey towards net zero

Finance has long been at the heart of global climate negotiations, energy transition, climate adaptation and disaster relief.

“The journey towards a more sustainable future requires an active approach from investors,” says Neha Coulon, managing director and head of ESG for EMEA at J.P. Morgan Private Bank.

“Engaging with fund managers who possess expertise in navigating the complexities of climate risk is crucial.”

With the goal of net-zero carbon emissions by 2050, sustainable finance has become an urgent priority. As drivers of sustainable economic growth, GCC banks are vital contributors to global climate efforts.

“We expect green and sustainable finance to become one of the main contributors to the growth of the banking industry in the GCC for the next few years,” Damak tells Gulf Business while projecting a higher volume of sustainability bonds and sukuk issuance from the region.

Sustainable finance can boost revenues for GCC banks and contribute substantially to businesses’ progress in meeting global climate goals, but success requires a strategic approach.

Neha underscores that by seizing the opportunities presented by investing in climate solutions, the financial services sector can create a resilient and sustainable world for future generations.

Global accounting firm EY said nearly three-quarters of the MENA banks have developed environmental, social, and governance (ESG) strategies, but few have robust ESG governance and accountability frameworks that promote rigorous implementation.

Meantime, the GCC banking sector has gone through a fundamental transformation and has been on a growth trajectory over the past decades. This development is playing an increasingly important role in the region’s overall economic growth.

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